Home insurance has a lot of confusing terminology, especially when it comes to the types of policies and how you can receive compensation. Replacement cost value, for example, refers to two areas: the total replacement cost value of your home, and a replacement cost value policy for personal belongings coverage.

 To break it down, home insurance covers three main areas when it comes to property: 

• Dwelling covers the physical home and its attached structures in case of damage or loss due to fire, wind, hail, lightning, smoke, theft, vandalism and more.

• Personal Belongings coverage covers personal items from the same causes of loss and damage that are covered under dwelling insurance.

• Additional Living Expenses cover costs related to temporarily moving if the home is destroyed after a disaster.

Actual cash value related to your home insurance policy’s personal belongings coverage.

Actual Cash Value vs Replacement Cost Value 

There are two ways a homeowner may receive compensation for lost or damaged belongings: actual cash value or replacement cost value. An actual cash value home insurance policy provides compensation while accounting for depreciation. So as the value of your items depreciates, or drops, so does the amount of compensation you can receive. For example, say you purchase a television for $1,000. A few years later, a fire breaks out and destroys most of your belongings, including the TV. Since you purchased it, the value of the TV has dropped to $500. Instead of receiving $1,000 in compensation, you will likely receive closer to $500.

A replacement cost value policy provides compensation without depreciation. No matter how the value of your belongings depreciate, this policy will provide compensation to help replace it with one of equal value.

Most home insurance policies are actual cash value when it comes to personal property. It is also the cheaper alternative. If you would prefer replacement cost value for your items, you may be able to ask your insurance agent about adjusting your policy. Keep in mind that certain items have limited coverage under home insurance policies and replacement cost value may not be available to cover all of your personal items. Objects such as jewelry, furs, art and electronics often have limited coverage under a basic home insurance policy and may need policy floaters to cover the cost of replacing or repairing them after a covered incident.